Friday, November 25, 2011
Stock Market Commentary:
Risk assets fell during the shortened holiday week as the situation in Europe continues to deteriorate and the latest economic data suggests the global economy may be slowing. This was the worst Thanksgiving week for stocks since 1932! For the week, the standout loser was the small-cap Russell 2000 index, falling -7.3% and closed at 666.16. The tech-heavy Nasdaq composite shed-5%, while the Dow Jones Industrial Average & S&P 500 both shed -4.7%. The market is back in a correction after all the major averages sliced below their respective 50 DMA lines on Monday (11.21.11). It is also disconcerting to see that all the major averages are back in negative territory for the year which bodes poorly for the fragile economic recovery. For months, we have argued in this commentary that from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Finally, others are starting to take notice of this important question. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly. What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). At this point, the path of least resistance is lower and remains lower until one of the major averages closes above its 50 DMA line.
Monday-Tuesday’s Action: China’s Economy Slows, German Bond Auction Flops, & U.S. Economic Data Doesn’t Impress
Over the weekend, a 12-member super committee failed to accomplish one simple goal: cut $1.2 trillion from the $15 trillion national debt! Unfortunately, leaders on both sides of the aisle are responsible for the short coming which is note ideal considering the U.S’. credit was downgraded in August due to its massive (and growing) debt. Since the government failed to make a deal to curb its debt we would not be surprised to see another rating agency “cut” U.S.’ credit rating even further. A deal needed to be made by Monday since it would take 48 hours of congressional review before Wednesday’s deadline. Spain appears to be the next European domino to fall as it struggles to stay afloat.
On Tuesday, stocks traded between positive and negative territory after the Commerce Department said the U.S. economy grew at a slower pace than previously expected in the third quarter. The latest revision showed the economy expanding at 2% in Q3 which was lower than the previous estimate of +2.5%. The minutes of the Federal Reserve’s latest meeting were released which larerly reiterated their recent stance: rate will remain low as the economy continues to recovery, albeit slowly.
Wednesday-Friday’s Action: China’s Economy Slows, German Bond Auction Flops, & U.S. Economic Data Doesn’t Impress
On Wednesday, a slew of risk assets fell after fear spread that the global economy will fall into another recession. Overnight, China’s factory sector contracted by the most in 32 months in November as new orders fell. This sparked fresh woes that China maybe heading for a “hard” economic landing. The news from Germany also added fuel to the global recessionary fire. German manufacturing fell for a second consecutive month in November and their latest bond auction was a flop.
In The U.S., consumer confidence rose in November to 64.1 from 60.9 in October and was slightly lower than the Street’s forecast for 64.5. The Commerce Department said durable goods orders, excluding transportation, unexpectedly fell -0.7% in October after revising September’s reading down to 0.6%. Economists were expecting a flat reading for October. Finally, the Labor Department said jobless claims rose by 2,000 last week to a seasonally-adjusted 393,000. This was just above the average analyst forecast for 390,000 but remained below the closely watched 400,000 mark.
In the U.S., markets were closed on Thursday in observance of the Thanksgiving Day Holiday and closed at 1pm EST on Friday. Stocks ended lower on Friday for the seventh consecutive session! In Europe, the S&P rating agency downgraded Belgium one notch to AA from AA-+ which added more concern regarding the euro zone debt contagion. Separately, an Italian T-bill auction was a flop which echoed Germany’s lousy auction from earlier in the week.
Market Outlook- Market In A Correction
The latest short-lived rally (that was confirmed on October 18) ended on November 21, 2011 when all the major averages sliced and closed below their respective 50 DMA lines. Technically, the market is back in the middle of its August- October range (1100-1230) after a bear (1074-1100) and bull trap (1230-200DMA). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide and loose action to continue until the market closes above its longer term 200 DMA line. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!